Transfer pricing at crossroads

11th November, 2011: Nov 11, 2011

11th November, 2011

Russia is expected to usher in a new legislation for transfer pricing from January, 2012 as set out in the Federal Law No. 227-FZ. The new law would apply to all companies whose transactions qualify as controlled and they would have to adopt one of the five methods of calculating price for tax purpose to determine whether a market price was used. In line with OECD guidelines the methods listed are Comparable uncontrolled price method, Resale price method , Cost plus method, Comparable margin method and Profit split method.

Australia is planning to bring in new regulation to reconcile the domestic transfer pricing law with OECD guidelines. This comes after the decision of the Australian Federal Court in a case where the Australian revenue authorities could not enforce their claim. In particular, the consultation paper floated in this regard discusses the merits of OECD’s profit methods over the present Australian practice of pricing individual transactions, desirability of adopting OECD’s ‘functionally separate entity approach’ attributable to permanent establishment and the Ralph Review recommendation of applying transfer pricing rules on self-assessment basis.

Transfer pricing has been the focal point in revenue augmentation for most countries in recent times. China came out with stricter compliance and documentation methods to try and safeguard its revenue with the release of comprehensive transfer pricing regulations in early 2009.

Copenhagen is attempting to strengthen its tax authorities with powers to call for audit where it is suspected that companies have used transfer pricing to charge artificially high prices to subsidiaries in Denmark. India had proposed to empower the Central Board of Direct Taxes to formulate Safe Harbour Rules in 2009 but the rules have not been finalised. India also proposes to bring in the Advance Pricing Arrangement (APA) from April, 2012.